Most of the clearly evident financial problems that surround us today stem from one cause - Debt Saturation.

Most, intuitively, sense this to be a correct assessment but few can either prove it or articulate it to the less sophisticated. Let me arm you to be the "Nostradamus" amongst your friends and colleagues in explaining the problem and what the future therefore foretells.

However, let me make it very clear, this will not make you popular. Smart maybe, but highly likely to make you unwanted at the social gatherings of the genteel.

The first thing you will need in your role of 'all seeing' is the back of an envelope, or a somewhat clean napkin at your next luncheon. You will need only a few simple facts to go along with your prop.

THE FACTS MAME, JUST THE FACTS!

First, if you could total the world's balance sheets you would find that it would approximate $200 Trillion. In putting together this total you would discover that 75% of all financial assets are debt assets worth $150 Trillion. To most of us, debt is the epitome of a liability. To banks, however, it is not. It is considered an asset and recorded as such a banks ledger. Your liability is their asset.

The historical debt payment over a long period of time is 6% per annum. The Federal Reserve's dividend payment to its holders of capital was originally established in 1913 at precisely this 6% and is still accrued accordingly. Remember also, in a fractional reserve, fiat based banking system money can only be loaned into existence.

Today we have approximately $9 Trillion (6% of $150T) in annual debt payments that must be absorbed annually by increased productivity of the working classes.

Consider that the US Economy at approximately $15 Trillion is 25% of the global economy. Therefore the global economy approximates $60 Trillion ($62T officially, but we will use round numbers so we don't lose anyone in the arithmetic).

The working class therefore has to increase productivity by $9T divided by $60T or 15% annually to absorb the current global usury charges.

In the last few years of explosive debt growth we have passed the point of the global economy being able to grow and improve productivity at a fast enough rate, not to be literally consumed by this existing debt burden.

Unfortunately, it gets worse.

One of the problems in using GDP as a measure of growth is that it includes government spending. In the case of the US, it is approaching 25% of the output of the country. Within that, approximately $3.7 Trillion is $490B in interest payments or 13% of US expenditures. This actually means that there is an additional 3% that must be added to the 15% or nearly 18%.

This is called Debt Saturation.

DIMINSHING MARGINAL PRODUCTIVITY.

A very unpopular chart to deficit spending hawks is the chart showing the change in GDP as a ratio to the change in debt. The easiest way to understand this chart is to consider how much the economy will grow for every dollar of increased debt. As you can see, the effect of increased debt has been steadily losing its ability to increase economic growth and since the financial crisis has decidedly turned negative.

Increased debt is now counterproductive to the growth of the economy because the economy simply does not have sufficient productive investments to absorb it. We may have plenty of investments but they are mal-investments. They are investments that simply cannot pay the debt financing utilized.

The Korean Times recently illustrated that despite a booming Asian environment, technology firms are now struggling to cover interest payments. One in three firms on the Kosdaq failed to earn sufficient money to cover interest payments in 2010. The interest coverage ratio, otherwise dubbed times interest earned (TIE), refers to the measure of a firm’s ability to honor its debt payments. 280 out of 876 Kosdaq-listed outfits, or 32 percent, could not reach the benchmark reading of one in the interest coverage ratio.

TELLTALES OF DEBT SATURATION:

1- Non Performing Loans

The mal-investment is just too large to contain and is showing up in ever-increasing levels of non-performing loans. This is despite rolling over loans at false asset values.

Non-performing bank assets are increasing globally! The above chart from Reggie Middleton's BoomBustBlog graphically depicts this indisputable trend. What is this signaling three years after the financial crisis?

The rise in the above US non-performing assets is alarming. It reflects a 9.5% change since 2005. Everything is not at all well in the US banking sector.

Equally concerning is what is happening in Central and Eastern Europe where the change is 7%. I personally consider Central and Eastern Europe to be the unaddressed 'sub-prime' problem of Europe. I suspect it will eventually replace the PIIGS in financial media news coverage.

2- Chronic Unemployment

The money lenders look at unemployment in a different fashion than the average person and would have us easily confused by its adjustments, birth-death models and other deceiving statistics. To them it is not about how many of our fellow citizens are unemployed, but rather simply how many net new jobs are being created to pay for the annual usury assessment fee of the $9 Trillion we previously discussed. Herein lies their problem.

The internet has had a profound impact on the increase in productivity. Schumpeter's creative destruction is an engine running at full throttle. Vast swaths of jobs are being made obsolete through the adoption of new technology. The 'clerical' industry has almost disappeared in the span of 15 years through operational innovations such as supply chains. This has been tremendous for corporate profits allowing them to maintain highly leveraged balance sheets. The problem is that it has been solely at the expense of real job growth. No matter what a corporation does to make money, it eventually comes down to a consumer having the money to pay for the goods or services it produces.

We have reached the saturation point where we have insufficient real income growth to maintain the leveraged balance sheets of corporations. Government social nets are becoming burdened with making up the difference in either transfer payments (i.e.45 Million on food stamps in the US) or subsidies ( North Africa paying 28% of country budgets toward food subsidies for the unemployed population to survive). There are examples everywhere if you care to look. I have written extensively on this in my series on Innovation and in articles such as "Fearing the Gearing".

3- Money Velocity Doesn't Increase with Money Printing

Debt Saturation occurs when aggregate income no longer supports debt burdens. When governments print money, eventually Money Velocity increases as people incorporate inflation expectations into their buying behavior. When we examine the Federal Reserve's Money Velocity statistics we see that something is very different this time.

We presently have inflation in what people NEED along with shrinking real disposable incomes. Since people must pay for their NEEDS with short term money (cash, check or credit card), there is little ability for them to adjust to inflation when they are living from paycheck to paycheck. If their disposable incomes were higher they would stockpile and turn their money over faster. Additionally, money as a multiplier would flow through our society. Instead, today the money does not move through multiple hands but is returned almost immediately to the banks as debt payment, since most intermediaries are also burdened with debt.

WHAT YOU MUST BE AWARE OF

First, You must understand the impact of mal-investments and the brake that debt is now applying to the Global Economy.

World Real GDP, adjusted for inflation on a year-over-year basis has plummeted. According to the World Bank this growth indicator has gone negative with the world's real GDP actually shrinking Y-o-Y.

The global growth engine has not only stalled but has clearly hit an unexpected brick wall.

Secondly, You must understand the significance of the stalled and possibly fatally ill "Shadow Banking" Credit Engine.

Similar to moving about on an airplane or train it is hard to determine the speed you are traveling, because you have a limited frame of reference. In a casual conversation with your fellow travelers it is easily forgotten or unnoticed that you are moving at a rapid speed. This is the situation we find ourselves in as the Shadow Banking System fails to rebound and the debt it once created is not being replaced. The liabilities of the Shadow Banking System are shrinking. These leveraged liabilities are now shrinking the global money supply despite every effort of central banks to combat it. The Central Banks are losing the battle. Like glacial tectonic shifts they are undermining the abilities of financial institutions to continue to carry and roll-over non performing debt.

Finally, You Must be Aware of: "Money Illusion"

The overlay below of the Nominal and Real (ShadowStats inflation-adjusted) Dow illustrates the concept of Money Illusion, the tendency of people to think of currency in nominal, rather than real, terms. Below the Dow series is the Consumer Price Index (CPI) from 1913 and with estimates for the earlier years.

The above chart reflects what is actually going on in the financial markets. The secular bear market that began in 2000 is still underway. Since the 2009 lows we are experiencing a Cyclical Bull Market counter rally that is to be fully expected as part of a Secular Bear Market.

The chart above is adjusted for inflation based on published CPI numbers. If ShadowStats inflation numbers are used, as is the case in the above chart, then the chart to the right would more clearly resemble longer term secular bear markets already experienced.

CONCLUSION

There is nothing magic in any of this and it has all been well documented, unfortunately by the Russians when they studied the capitalist system to identify its fundamental weaknesses. The Kondratieff long wave shows that the capitalist system suffers the build up and purging of debt on a generational basis on the frequency approaching 55 year cycles. We have extended this natural cycle by means of un-natural acts which I have written about in my extensive "Extend & Pretend" series of articles. Even in the days of old the king resorted to "jubilee" to cleanse the system. Of course we are much too sophisticated for such a simple solution today.

We have papered over the realities of "Too Big to Fail" by not allowing the proven tenets of capitalism to work. We have Anti-trust laws under the Sherman act to address 'too big', Control Fraud Laws to address questionable ethical behavior for the sake of profit (like mortgage fraud, liars loans etc) and Bankruptcy laws to liquidate failed enterprises to force debt holders to take haircuts and swap debt for equity. Instead we allow the prevalent game of Regulatory Arbitrage to run without restriction or detection. Existing laws are not being exercised in an attempt to protect what amounts to the emergence of a crony capitalist system. Benito Mussolini had a somewhat different world for the merging of corporate and government interests that I will leave for readers to recollect who have a historical penchant. It is not a word easily digested in the polite 'cocktail chatter' of today's genteel upper middle class.

Welcome to Kondratieff's Long Wave Cycle

FORETELLING THE FUTURE

In your new role as 'Nostradamus' to your friends you can safely predict a decade ahead to be a secular bear market in financial assets, in real terms. Nominal values may not show this clearly but it will be very evident in the reduced standard of living most Americans will experience.

You are going to have to work harder and harder, for less and less to survive at a lower and lower standard of living.

This will all be required to support the annual $9T debt bondage we have assumed as our politicos add additional 'stimulus' to a suffocating and debt saturated global economy.

Gord overlooked a critical point; productivity is tightly coupled to energy. Whether or not you believe that peak oil is here we all know that oil is getting harder and more expensive to extract. More expensive energy = lower productivity.

It is not related to this comment, but I tried recreating that chart showing delta GDP / delta debt because I believed that it made sense that that would happen.

However, I used the same data and tried it for both real GDP using official statistics, real GDP using Shadowstats CPI and nominal GDP and the corresponding values for debt, and had no such luck recreating that chart.

I asked the creators how they got around the problem of it actually being negative EVERY TIME delta GDP is negative (every recession) as long as delta debt was positive and there was no answer.

Therefore, although I'm not going to argue that our economy is destined for failure, I take that chart with a grain of salt until I get an explanation on it.

Wouldn't it be better to plot delta (GDP) / delta (debt to GDP)? I am assuming this is what was done, even though the graph doesn't say anything about it.

Personally, even though it would take a fair amount of work, I would be very interested in seeing a graph of delta GDP / delta [total interest paid annually (as a % of GDP)]. Me thinks this would be the more telling metric.

Totally off topic and perhaps I am becoming paranoid from being on this site too much but Tyler, are you monitoring my web activity?

Last week I went to look at umbrellas at Amazon and then saw an ad on this site from Amazon with umbrellas, earlier today I looked at guitars online and saw a guitar ad here seconds later. I just looked at Mother's Day Rings and just saw an ad for Rings from Zales...What gives?

Ah...thanks for the response. It is not a huge deal but it happened too many times to be a coincidence. It is not a big deal, actually pretty smart on Google's part. But I still ain't buying their stock!

S & S, thanks man. I had like 10 active cookies on my Ipad. I had just started getting crap e-mails and no doubt it was from one of these guys. If not I'm still glad they can't track me, that's bullshit. If I wanted to read their ads I would.

You can also edit your hosts file on your machine. Or more better yet, google for one and replace yours. Its nothing harmful, it just redirects known ad servers to your own machine (who then doesn't find them).

I would have yanked my 401k and paid the taxes and penalties or whatever, but I recently found out that my company's is a qualified plan, which means that it's out of reach until I quit or retire. How's that for some shit? The government lets the company deduct the matching contributions as long as there's a clause in the agreement prohibiting us from getting our mitts on our own money when we want to. Now why, pray tell, would the government give two shits about whether or not I cash out and pay my taxes/penalty early? Oh - that's right. None of us are trusted to look after ourselves anymore, what with the death of individual accountability and all. I don't want to think about the other reasons the gov't might want to force people to keep gambling in the markets.

I am not so sure 401k plans are worth it any more for the reasons you state. It's theoretically OUR money but in reality it is controlled by the State. I cashed out one of my old plans last year, took the taxes up the wazoo but invested about half in metals. Made up all the taxes already. Now it's my money to do as I please.

It goes way beyond the boomers. IMHO, back to Jackson who had the guts to kill the last central bank. All down hill since he left office. I am certainly down with the Guy Fawkes solution. I always at least try to cleanup my own mess.

Whew!...Might have to savor this one slowly while having a cold brew this evening

Now I must go outside and mix with the general public...and hope i don't have to hear anyone speak about how they'll get approved for another credit card....so that they have the means to pay off some credit card they are having trouble paying down.

Good point. I may have to look into such an idea/maneuver. What a cool way to serve up a **** sandwich to the Morgue. Now i wish i lived closer to a coastal city...soze i could make my oppression felt.

He's right Cossack, I work with a guy that just told me today he got approved for another CC. He was all relieved because now he has some breathing room. Dope, more like he put another twist in the knot around his neck.

As home values continue to decline and loan-to-value ratios rise, the number of homeowners choosing to walk away from their mortgage obligation will relentlessly grow. That means growing trouble for nearly all major housing markets around the country, writes Keith Jurow.Read more: Strategic defaults could get very ugly.

And you need not grow at all, you only must create and/or tithe that compound 2.56% for the next 30 years, or its equivalent, to the wizards who created the money out of thin air for you... or we all die.

I have 5 distant ex-friends from the 70s and 80s who don't have to work and are somewhat well off and they did it by selling illicit drugs for a short period around the disco era. Boy are they laughing now. Crime pays.

My union pension went bust and I will work for the rest of my life. Oh well...wish in one hand...

Awesome buying opportunity in silver right now! I have been pleading with my brother to get out of the dollar. He finally listened, and he is lucky the price came down just in time. I don't think this is going to last. It might go a bit lower, but if it doesn't....

Do you want the good news, or the bad news, in terms of the majority socio/econ/polit idealogy here?

The good news:

The good news is that the era of globalisation, monetary control and debt are coming to a close, and you will soon be without sociological control [MSM 24/7 Idol, CSI and nonsense, being lied to constantly], economic control [Crash, debt, rigged games] and political control [black hawks are useless when you can't afford to fuel them, kids indoctrinated to play COD then do the same in Iraq].

The bad news:

Those were the nice cops.

The bad cops are coming, and for one thing: they're fucking pissed you trashed the oceans.

Don't for a moment think that the world is in the image of the decadent US...it will move on...It'll hurt bad but it will happen...Empires fall and their dregs smell for the locals but not for the others...we all have our dregs, our ghosts, to live with...

Think back a while, to the whole "1984" vrs "Brave New World" debate - the 'good cops' won that one; we had our 'Brave New World', with the promise that 'uplift' & the green revolution would drag everything upwards. Sixty-six years on, countless CIA sponsored coups, the failure of the USSR and so forth... the battle of 'isms' is over.

Think about this with a decent amount of history behind it: both Capitalism and [post-WWII] Communism promised to provide Utopia "without control", or rather, "maximising and uplifting the participants to the next heights of humanity". Both of them promised it (as did Nazism, but hey); we can all critique the failures of both to provide it, but both sides promised it. This is why the entire "left / right" paradigm is false, and outdated.

[If you want to put this debate back further, we can - 'The Waste Land' is a mediation on, amongst other things, the destruction of the Holy Roman Empire.]

Newsflash: Both failed. Communism failed due to bad economics [but, shit you not - at least they got their nuclear crises' dealt with fast, and at least they tried to maximise human potential in their athletes and education] and cronyism; Capitalism failed because instead of uplift, 1/3 of the participants turned into fucking whales and the last 1/6th producing wealth became sociopaths who believed that wealth came out of a computer algorithm and the economist's mantra of "infinite growth" was true. Top tip: Empathy matters; in the long run, sociopaths mean no society, which means no economy.

Anyhow, this is 2011. As stated: New Deal Time.

For the record, you trashed the oceans, which isn't a smart move. If you're stupid enough as a species to ruin the bottom line of your ecology then don't be surprised at the outcome; which, at this point, is probably equatable to "lunch".

George Soros selling his silver & gold: He can try to make people think the economy is getting better so they cash in their PM's for dollars? Thats not going to work. Even if the price of silver went back to $20/oz (id be even). He can try all he wants to create an illusion with his puppet; Obama.

I almost pissed my pants laughing at the news when our "President" on TV live speaking about Osama Bin Laden. LIES LIES LIES. It's like Charlie Brown when I was kid. Remember the teacher? "WHAAWHAWWAWAHwaaawawawaw....

This idiot sounds as maniacally insane on gold as that bastard Andy Smith, of Mitsui Metals --- remember him Rocky? He was Jon Nadler's mentor, and even out-Nadler'ed Nadler most of the time in his sheer imbicilic rants against gold.

I do like that graph, but he had to go make the ponzi scheme comment. Based on that train of thought anything that you dont consume and doesnt produce income is a ponzi scheme. Why the hell would i want anything that retains value, i will have to rely on a buyer to cash me out. hmmmm doesnt that mean fiat is a ponzi scheme...

"Even with ultra low down payment programs like loans backed by the FHA many people are still struggling with the idea of saddling debt on top of already large piles of debt like a poorly played hand of Jenga. We already know housing was a bubble and we are dealing with the ramifications of the pop back in 2007. Yet the higher education bubble keeps moving higher and higher. I think viewing a chart of California home prices and the University of California tuition over the years might shed a bit of perspective here."

Does it mean Soros thinks the economy is improving when he sells gold? I don't think so. I know I will be excoriated by this crowd for saying so, but my view of the eventual outcome of this crisis was more along the lines of deflationary depression rather than hyperinflation. So far, the Fed has worked against me.

I also took note that the credit/housing bubble was the biggest in history -- I saw an estimate of $10T. While the Fed has pumped in money, banks have deleveraged, and as this chart indicates, the shadow banking system has really shrunk.

Someone explain to me how the actual money supply is rising. I don't think it is, so I can't see buying gold. It must be panic (read: bubble) that has driven gold to these levels. Prechter makes sense to me, Schiff does not.

the only thing that hasn't been done has been to put the money into circulation. right now it is sitting still and lending is being somewhat restricted so no hyper inflation. it is still a game of catch up with all the printing done for the last 40 years. that inflation is happening therefore the rise in the PM's. but unlike the cash saving economy of the 20's and 30's nowadays everybody is living on credit and therfore doesn't have money to spend on useless items therefore the deflation.

worthless money = higher prices for tangibles

having no money to spend = reduced prices for the shit we want but can't afford.

Excellent article and info Gordon--perpetual loan rollover has left the system with no clothes left-well maybe a sock. This is the story of something that is on fire from napalm and just keeps rolling hopeing the flames go out-not knowing it goes out when it decides to burn out.

The illusion continues as my visit to the local coin dealer this am had about 35 customers within a span of one hour (Since the owner is a friend I just shoot the shit)--------everyone there was selling silver--yes selling their silver JEWELERY. One guy sold a 20 spot of 2010 eagles--I purchased them for GET THIS $48 a piece so the physical market is not selling period. Crash and burn is coming.

The crash and burn in paper silver and gold is coming, and it will be a doozie. That is paritally why paper silver and gold are smashed recently. Lots of rich insiders are getting out of paper silver and gold to raise funds to get into physical silver and gold. They know those fraudulant paper assets will soon crash and burn (if not explode), sending physical to the moon. But in the short run their selling of paper fakes brings gold and silver temporarily to a very wonderful price to buy. Convert all paper assets to physical now, while you still can.

Debt saturation! That perfectly describes the situation of hundreds of millions. It's why consumer spending can never come back to where it was and GDP must drop DRAMATICALLY as it was artificially propped by getting so many people in debt that couldn't ever be repaid.